Debt Service

Debt Service in Developing Countries

Debt service in developing countries that causes extended, seemingly intractable social issues is usually the result of one of three scenarios: (1) Funds were lent to countries with a poor governmental structure, meaning with leadership not beholden to the population for its decisions; (2) debt was transferred that arose during colonialism, meaning historical costs incurred by the colonizing country were transferred to the newly independent colony at its independence; or (3) loaned funds were not properly managed, usually meaning that the lenders (in the wealthier countries), instead of ceasing to lend, actually lent more funds as economic or political situations deteriorated.

According to data presented in a 2005 news article by the British Broadcasting Corporation (BBC), total debts amassed by the world's poorest countries increased more than 20 times in the 3 decades from the early 1970s to the beginning of this decade, rising from—in U.S. dollars—$25 billion in 1970 to over $520 billion in 2002. Specifically to Africa, its share of the total in 1970 was less than $11 billion, not even half the total owed by poor nations. But, by 2002, total African debt stood at $295 billion, over half the total owed by all poor countries. Perhaps the bleakest fact is that, although the world's poorest countries have repaid $550 billion in principal and interest over the past 3 decades, on $540 billion of loans, these same countries are currently spending $13 on their debt repayments for every $1 they receive in grants.

Obviously, a country whose government cannot use its revenues, including (and especially) any grants received as humanitarian aid, for any current activity other than debt service, will have social issues. Because all three scenarios (described earlier in this section) seem to be caused by the actions of foreigners, social unrest is also often stoked.

Debt Service as a Political Issue

Debt service as the root cause of social problems has its origin in the creation of the system of exchange rates brought into effect with agreements reached at the conference at Bretton Woods, New Hampshire, in 1944. The representatives of the sovereign states in attendance created the International Monetary Fund (IMF) as an independent organization monitoring monetary flows among sovereign states, agreeing to certain principles for measurement of those flows—and either to assist or to threaten to sanction any state's monetary policy as it affected world prosperity. Because the member states are generally represented at the IMF by their most senior treasury or finance official—usually an unelected cabinet member or other appointee—virtually every intervention has both monetary and political dimensions.

...